Money managers under the microscope
Dale Gabbert: Swedish massage hits the spot
Guest blogger Dale Gabbert heads the funds group in the London office of law firm Reed Smith. His practice covers hedge funds, private equity and property funds and he is the author of Hedge Funds, a legal guide published by Butterworths Lexis Nexis.
The views expressed here are entirely the author’s own and do not constitute Reuters’ point of view.
After the controversy surrounding the draft directive some perspective has returned as the Swedes take control of the EU Presidency and attempt to untangle the issues and build some consensus.
The Swedish intervention is timely and comes as the row gathers pace, with the UK government having finally entered the fray and accused the directive’s proponents of having “pandered to prejudices” and “tilted at mythical windmills”.
Considering the level of invective flying around, the Swedish paper is measured and concise. It identifies eleven main areas of focus and elaborates on the problems and some possible solutions (many of which are framed as alternatives).
One of the big areas identified is the need to be more consistent with other directives, including MiFID, UCITS IV, the Transparency Directive and the Prospectus Directive. They correctly identify that the current draft does not integrate with the existing EU legislative framework to the degree one would expect and is, in a number of cases, inconsistent with it. In particular the Swedes identify that the capital and authorisation requirements appear to overlap with MiFID and UCITS IV.
Whilst they don’t nail their colours to the mast, they appear to be tending towards reconciling the draft directive with UCITs and MiFID whilst eliminating the overlap with the Transparency and Prospectus Directives. It is striking, for example, that they are willing to consider deleting the entire section on reporting of acquisition of a controlling influence.
The paper is also strong on dealing with the lack of compatibility of certain parts of the draft directive with ‘real world’ asset management. The sections on the depositary and delegation provisions are cogent and clearly the Swedes have taken on board industry feedback, going so far as to observe that, “Given the global character of the activities of many market players, the current draft does not seem workable.”
Likewise on delegation it is clear that they are not sympathetic to the third country delegation provisions, suggesting that one option would be to delete the articles relating to delegation of administration and valuation to non-EU countries entirely and instead rely on the general provisions.
More diplomacy is evidenced in their response on the provisions dealing with non-EU funds and non-EU fund managers where they simply state that the draft directive should be “so far as possible, be consistent with global standards”, although it seems clear that they are critical of the inherent protectionism of the third country provisions.
There is also good commentary on leverage, the lack of clarity of key definitions and the need for a level playing field amongst different types of alternative managers. It looks likely that at least some closed-ended funds will be removed from the scope of the directive. Leverage limits are scrutinised, although rather disappointingly the plethora of possible solutions still leaves it unclear as to who will have the final say as between the Commission and home state regulators.
The paper is somewhat weaker on the provisions on valuators and it is unfortunate that, although they distinguish between different types of funds including hedge funds, private equity funds and closed-ended funds, this is by reference to specific issues, rather than considering the broader issue of whether the directive should even be attempting to regulate such a broad range of funds.
Overall, however, this is a good attempt to frame a diverse and contentious group of issues and a brave one for setting out some possible solutions.